Equal Ground

By Lori Weaver

Pipelines will provide ethanol the transport efficiency to compete equally with other fuels.

It’s simply a matter of supply and demand.

That’s how Mark DeVries, Director of Business Development for POET Ethanol Products, Wichita, Kansas, best characterizes the pipeline project proposed to stretch from ethanol production points in America’s heartland to areas of high demand in population centers dotting the eastern seaboard.

The 1,700-mile system planned by POET and its project partner, Magellan Midstream Partners, L.P., Tulsa, Okla., could be ready for operation as early as 2014 and would help level the playing field with petroleum-based fuels which have made use of pipeline transport for over a century.

“This could be a big step in improving the efficiency of ethanol transportation,” says DeVries. “The ethanol industry is competing with other fuels, such as gasoline, which are currently moving very efficiently through pipeline systems. This project would provide the efficiency to allow ethanol to compete equally with those other fuels.”

Until very recently, rail, truck and barge have been the only means of transporting ethanol in the U.S., but both POET and Magellan have had an interest in improving transport efficiencies for quite some time.

“Pipelines in general are a good means for transporting fuels from areas of high supply to high demand,” explains DeVries. “But they are capital-intensive. You want to have a lot of supply to flow through the system.” He adds that traditional transportation providers will still be necessary, even if the pipeline project is successful.

Jeff Lautt is Executive Vice President for POET, Sioux Falls, S.D. He underscores the continued need for rail and truck transport, even after a major ethanol pipeline is a reality for the industry. There will continue to be other transport needs involving other areas of the country and other volumes, he says.

While the project is not the first ethanol pipeline in the U.S., it is the first of this magnitude. Late last year, Kinder Morgan ran its first commercial load of ethanol through a pipeline running from Tampa to Orlando, Florida, proving that pipelines could be a viable means for transporting renewable fuels.

Since December, that pipeline has been continuously moving commercial batches of ethanol. “We have increased volumes shipped each month since we began moving ethanol through the line and now provide over 40 percent of the total Orlando, Florida, ethanol market demand via pipeline,” says Emily Mir Thompson, spokesperson for Kinder Morgan, Houston, Texas.

The company sees the increase in ethanol volumes and ability to provide an additional mode of transport for ethanol as successful measurements of the project.

“From here, we’re working on adding ethanol storage at our southeast terminals as well as evaluating the Plantation Pipe Line system for possible commercial shipment of batched ethanol,” says Thompson.

Bruce Heine, Director of Government and Media Affairs for Magellan, says the company has a successful history of transporting traditional fuels via pipeline, but transporting ethanol presents some unique challenges.

“Ethanol has a higher tendency to cause “stress corrosion cracking” which can lead to internal cracks in the pipeline” Heine says. New and innovative technologies will allow for protection of the pipeline system and such advancements are happening quickly as better additives and materials are identified.

Lautt agrees, but adds that there may have been some misconceptions that have unduly fueled concerns over transporting ethanol in a pipeline system. “What you can’t do is ship in existing pipeline systems because those have been designed for oil and gas. Most of those pipelines are in excess of 50 years old,” he explains. But with today’s technology, Lautt says pipelines are a viable option for ethanol transport.

The pipeline proposed by POET and Magellan will have the capacity of moving 250,000 barrels per day or about 3.8 billion gallons of ethanol a year. While POET may have first discussed the idea for a pipeline some five years ago, the trigger point according to Lautt was reaching the point of being able to assure adequate supply to make the capital-intensive venture viable.

Suppliers will be able to tap into the system either by a direct connection between an ethanol plant and the pipeline or by use of “tank farms” which serve as aggregation points for supplies of ethanol from a number of sources within an area. Heine says the tank farm model has been used successfully by the petroleum industry.

Preliminary economic legwork has yielded an estimated price tag of $3-3.5 billion to develop the project. But such an investment brings with it economic development in the form of jobs during the construction phase as well as operation of the system once it’s complete. The project is currently in its feasibility stage, but the financial structure is likely to take the form of equity participants – companies that run and operate the system – and shippers who would pay a toll for utilizing it.

Heine says work on the proposed pipeline is currently focused on two areas: outreach efforts with members of Congress to modify the guaranteed loan program of the Energy Policy Act of 2005 and meeting with prospective shippers, producers, refiners and marketers.

DeVries expects a decision on whether or not to move forward with the pipeline system should come by the end of this year. Both he and Heine say that decision is likely to hinge largely on economics, including successful amendment of current energy policy that would allow a guaranteed loan program to be extended to include pipeline construction. Current language for the program is directed at plant construction, making it difficult for the pipeline project to meet requirements.

On April 3, Sen. Tom Harkin (D-Iowa), along with Senators John Thune (R-S.D.) and Tim Johnson (D-S.D.), introduced S828, a bill designed to do just that. The proposal is currently in committee. In introducing the bill, Sen. Harkin pointed to the ability to transport ethanol via pipeline systems as a major step in bolstering the use of clean, renewable homegrown sources of fuel.

“Promoting the planning and development of projects that transport renewable fuels efficiently and inexpensively helps enlarge the market for biofuels like ethanol, reduces our dependence on foreign fuels and will provide good construction jobs,” he said.

On the House side, fellow Iowa Democrat Leonard Boswell introduced HR864 in February, legislation also designed to extend the loan guarantee program to include construction of renewable fuel pipeline systems. It, too, is in committee.

If it becomes law, changes to the energy act could provide guaranteed loan funding for up to 90 percent of the project cost with the remainder coming via contributions from participants, says Heine. The changes to the program would also provide opportunities for other developers to construct pipeline systems for renewable fuels. Heine says the bills have a lot of support from members of Congress in the Midwest who readily see the potential for improving the transportation efficiency of ethanol producers in the region.

If the decision is made by POET and Magellan to move forward on the pipeline project, Heine estimates it will take about two years to do the necessary regulatory work and another two years to build the physical structure. DeVries adds that the amount of time necessary for those early phases of the project can be difficult to estimate, but he expects the system could be up and running as early as 2014.

“That could vary widely, depending on how long it takes for the environmental impact study and addressing issues such as achieving needed right-of-ways and the necessary permits, as well as obtaining legislative support. But by the end of 2009, we should have a pretty good handle on the economic picture so that we can make a decision on whether to move forward,” he explains.

That economic picture will likely be colored in years to come by growing demand for ethanol spurred by the revised Renewable Fuels Standard (RFS) which will continue to require an increasing percentage of renewable fuels be used in motor vehicles. Lautt says that requirement generates further confidence that the supply necessary for the pipeline to operate efficiently will be available.

The RFS program as amended will require 15 billion gallons of corn-based ethanol to be blended into gasoline by 2015 and a total of 36 billion gallons of biofuels to be blended by 2022, at least 15 billion gallons of which will come from corn-based sources and another 21 billion gallons minimum from advanced and cellulosic sources.

“POET has a role in developing and promoting modes of transporting that ethanol to the consumer,” DeVries adds. “As the amount of ethanol consumed increases, a pipeline system can more efficiently transport it.”

Both POET and Magellan are poised to provide the knowledge and experience necessary for moving the project forward should it be deemed feasible at the end of the year, observes Lautt.

“It’s important to have a partnership that is synergistic and easy to work with,” he says. “POET brings a lot of expertise to the project. Magellan brings a lot of expertise to the project. Together, the combined expertise of the two partners is what is really needed for project success.”

DeVries and Heine seem to agree. “We have definitely enjoyed working with Magellan,” DeVries says.

Heine echoes the sentiment. “I can’t tell you how strongly we feel about the positive relationship with POET,” he adds. “There is a tremendous amount of effort and good will in the relationship and we look forward to moving forward with the partnership.”

Lautt is optimistic over the outlook for the project and points out that success of such a system is not only a success for the partnering companies, but for the industry overall.

“The time and dollars that we have put into assessing this project is not only for our own benefit, but because it makes sense for the industry and supports the country’s overall goal of fuel independence. This pipeline is a key piece of infrastructure that will benefit not only the current generation, but future generations as well,” he says.